International Banking Crises:

A Dossier

Mauro F. Guillén

Source: Luc Laeven and Fabian Valencia, “Systemic Banking Crises: A New Database.” IMF WP 08/224.

Frequency of Financial Crises

Twin crisis = banking + currency.

Triple crisis = banking + currency + sovereign debt.

Selected Banking CrisesCountry Initial

Year% Nonperforming

Loans at PeakGross Fiscal Cost

(% GDP)4-Year Output Loss

(% GDP)

Spain 1977 n.a. 5.6 2.2

Egypt 1980 n.a. 38.1 n.a.

Chile 1981 35.6 42.9 92.4

Senegal 1988 50.0 17.0 32.6

USA 1988 4.1 3.7 4.1

Sweden 1991 13.0 3.6 0.0

India 1993 20.0 n.a. 3.1

Brazil 1994 16.0 13.2 0.0

Mexico 1994 18.9 19.3 4.2

Japan 1997 35.0 24.0 17.6

Korea 1997 35.0 31.2 50.1

China 1998 20.0 18.0 36.8

Russia 1998 40.6 6.0 0.0

Turkey 2000 27.6 32.0 5.4

Argentina 2001 20.1 9.6 42.7Source: Luc Laeven and Fabian Valencia, “Systemic Banking Crises: A New Database.” IMF WP 08/224.

Source: Carmen M. Reinhardt and Kenneth S. Rogoff, “This Times is Different.” NBER WP 13882 (2008).

Sample: N=66.

Source: Carmen M. Reinhardt and Kenneth S. Rogoff, “This Times is Different.” NBER WP 13882 (2008).

Genesis of a Crisis

Scant Regulatory Oversight

Originate-and-Distribute

Model

Deterioration of Underwriting

Standards

MortgageSecuritization

Mispricing of Risk

Credit Default Swaps

Excess Global

Liquidity

CrisisExcessiveFinancialLeverage

LowInterestRates

Drive to Increase Investment Returns

Rising Real Estate Prices

© Mauro F. Guillén, The Wharton School.

Growing Importance of Finance

Note: Financial services and insurance accounted for 7.8% of U.S. GDP in 2006.

Housing Prices

Subprime Defaults

Mortgage Defaults by Country

Source: Analistas Financieros Internacionales, based on OECD data.

Debt

Leverage

Regulatory BalkanizationOffice of

Thrift Supervision

Federal Deposit

Insurance Corporation

Individual States

Department of Labor

Office of the Comptroller of the Currency

Federal Reserve

National Credit Union

Administration

Securities and Exchange

Commission

Commodity Futures Trading

Commission

Commercial Banks

Thrifts

Insurance Companies

Securities and

ExchangesFutures

Credit Unions

Industrial Loan

Companies

Bank Holding

Companies

Source: The New York Times, 5 October 2008, Sunday Business Section, p. 9.

Artist: Laura Gilbert. http://www.securitiesdocket.com/2008/10/04/the-zero-dollar-bill/

Possible Actions• Guarantees on deposits: most countries.• Lowering of reserve requirements.• Deposit freeze: e.g. Argentina ‘01.• Bank holiday.• Liquidity assistance.• Unloading of bad debt.• Insurance of bad debt.• Bank intervention & restructuring:

– e.g. Spain ’77, Sweden ‘91, Mexico ‘94 Japan ‘97, Korea ‘97, China ’98, Turkey ‘00.

• Bank liquidations:– e.g. Spain ‘77, Egypt ’80, Chile ’81, Senegal ‘88, USA ‘88, Sweden ‘91, Japan ’97, Korea

’97, Russia ’98, Turkey ‘00.

Stumbling Along

Activist Fed

Liquidity Assistance

So Far

• Countrywide [BoA].

• IndyMac [Gov’t].

• Washington Mutual [JPM].

• Wachovia [WF or Citi?].

• Freddie Mac [Gov’t].

• Fannie Mae [Gov’t].

• AIG [Gov’t].

• Bear Stearns [JPM].

• Merrill Lynch [BoA].

• Lehman Brothers.

• Goldman Sachs (*).

• Morgan Stanley (*).

• GE Capital (?).

(*) Turned into bank holding companies.

The Investment Banks

The Wall Street Tournament

Biggest Write-Downs

European Woes• Britain: Northern Rock, HBOS, Bradford & Bingley.

• France: Société Générale.

• Switzerland: UBS.

• Germany: IKB Deutsche Industriebank, Hypo Real Estate, the Landesbanks.

• Benelux: Fortis, Dexia.

• Italy: UniCredit.

• Spain: The small savings banks.

• Ireland: Bank of Ireland, Allied Irish Bank, and four others.

• Iceland: Glitnir Bank.

Resurgent Sun?• Sumitomo Mitsui Financial Group invested

$1 bn in Barclays.

• Mizuho invested $1bn in Merrill Lynch.

• Mitsubishi UFJ is paying:– $3.5 bn for 35% of UnionBanCal.– $8.4 bn for 20% of Morgan Stanley.

• Nomura has bought the Asian, European, and Middle Eastern divisions of Lehman.

Source: Sovereign Wealth Fund Institute.

Sovereign Funds to the Rescue

Barclays PLC Quatar Investment Authority 7.7 3,483

When the end of the world arrives, how will the media report it?

USA Today

WE’RE DEAD.

National Enquirer

O.J. AND NICOLE, TOGETHER AGAIN.

Wired

THE LAST NEW THING.

Rolling Stone

THE GRATEFUL DEAD REUNION TOUR.

Discover Magazine

HOW WILL THE EXTINCTION OF ALL LIFE AS WE KNOW IT AFFECT THE WAY WE VIEW THE COSMOS?

Inc. Magazine

TEN WAYS YOU CAN PROFIT FROM THE APOCALYPSE.

The Wall Street Journal

DOW JONES PLUMMETS AS WORLD ENDS.

The Economist

WORLD EXTINCT, CAPITALISM SURVIVES.